As the Securities Exchange Commission and federal prosecutors continue their crackdown on what they perceive to be “systemic” insider trading within the hedge fund industry, now more than ever it is critical for all industry participants to be aware of the line between good research, including entirely lawful information-gathering, and impermissible insider trading. In a guest article that should be required reading for investment, legal, compliance, marketing, operational and other professionals at hedge fund managers and their service providers – in short, for everyone in the hedge fund industry – Harry S. Davis and Richard Morvillo, both partners at Schulte Roth & Zabel LLP, and Justin Mendelsohn, an associate at Schulte, examine some of the commonly misunderstood areas of the law of insider trading in the context of the current, unprecedented regulatory environment. Understanding the subtleties in the statutory framework is fundamental to protecting hedge fund management firms because, as we have all observed, mere allegations of insider trading can wipe out a multi-billion dollar hedge fund operation through massive investor redemptions. In particular, this article discusses: the current regulatory environment; the definition of an “insider”; the broad scope of what constitutes a “trade in securities”; the meaning of a trade which is “on the basis of” material, non-public information; determining whether information is “material”; and the “mosaic theory” and its relationship to “materiality”. Three among many critical points highlighted by this article are: (1) the definitions of “insider” and “security” for insider trading purposes are broader than you may think; (2) you do not have to actually use the information you receive in trading for a trade to be “on the basis of” that information; and (3) the “mosaic theory” does not permit a firm to trade in the securities of an issuer while a person at that firm is in possession of material, non-public information about that issuer.